What Could Yellen’s Chairmanship Mean for the LIHTC and NMTC?

With the shutdown behind them, Congress is now expected to turn to other pending matters in the coming weeks, including as-yet-unscheduled Senate hearings to consider Janet Yellen’s nomination for Federal Reserve chair. A Senate Banking Committee hearing could be held before the Thanksgiving holiday, making this is a good time to look into her views and comments on low-income housing tax credits (LIHTCs), new markets tax credits (NMTCs), the Community Reinvestment Act and the financial sector.

As far as I can determine, Yellen has not authored papers that specifically address the LIHTC, NMTC nor other community development tax credits as an academic. However, she has mentioned the NMTC and LIHTC in a few speeches during her time as a Federal Reserve official. In these speeches she has indicated a largely positive view of these credits. In a 2006 speech at National Community Reinvestment Conference, Yellen highlighted the LIHTC and NMTC as emblematic of a “shift in the federal government’s role in community development.” She supported the programs wholeheartedly, saying:

“Instead of providing funds directly to neighborhoods, these programs encourage private investment by offsetting risk through tax incentives and credit enhancements. The community development finance field has become extremely innovative in the way it secures both equity and debt financing, and has brought a much wider range of investors, lenders, and funders to the table.”

Yellen demonstrated an understanding of the flexibility of the NMTC by observing in a 2008 speech at the Federal Reserve Bank of San Francisco Conference that the NMTC could serve as a key tool in addressing foreclosure, stating the “New Markets Tax Credits … [could] generate much needed capital” for the redevelopment of foreclosed properties.

Yellen’s stance on both these programs is very encouraging, but it is important to remember that as Federal Reserve chair her direct influence on the LIHTC and NMTC programs would be limited. Where Yellen will have more indirect influence on the LIHTC and NMTC will be in the world of financial regulation. The Community Reinvestment Act (CRA), which encourages banks to invest in low-income communities, is a key motivator behind bank involvement in LIHTC and NMTC investments. The way CRA rules are interpreted and enforced are – to a certain extent – shaped by the Federal Reserve and its chair.

So what Yellen’s views on CRA? Overwhelmingly positive. In the same 2006 speech where she lauded the LIHTC and NMTC, she defended the CRA against accusations that “problems in the subprime market” were caused by “CRA-motivated lending.” She pointed out that “most of the loans made by depository institutions examined under the CRA have not been higher-priced loans, and studies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households.” This suggests that Yellen could use the Federal Reserve’s ability to influence CRA enforcement to encourage more affordable housing and community development lending.

We should also remember, though, that Yellen is a strong advocate for higher capital requirements for financial institutions, such as a requirement that certain large, complex banks maintain a minimum level of unsecured long-term debt, and that the biggest banks should “maintain a fatter capital cushion against losses than their smaller peers,” ranging between 1 percent and 3 percent of their risk-weighted asset. The overall net effects of such policies are unclear; in the short run they negatively affect the ability of banks to lend and make equity investments. This would have adverse effects on the utility of the LIHTC and NMTC. In the long run, if these policies served to stave off another financial crisis, they could help prevent a reoccurrence of the collapse of LIHTC demand we saw in 2008-2009.

Of more immediate concern among banks will be Yellen’s view of the Volcker rule, which limits a bank’s ability to make private equity investments. This limit on private equity investments could, as I have written before, limit banks from investing in tax credit properties. While the NMTC Working Group and LIHTC Working Group have sent letters to bank regulatory agencies asking that the NMTC, LIHTC and other similar tax credit programs be formally recognized as falling under the “public welfare” exemption to the Volcker rule, the federal agencies involved have yet to issue final Volcker rule guidance. So, how would Yellen’s appointment to the Federal Reserve Chair position change things? Not very much. Because Treasury Secretary Jack Lew has issued an end of the year deadline for the regulatory agencies in charge of finalizing the rule, and because Yellen’s chairmanship begins Jan. 31, 2014, she wouldn’t be promoted quickly enough to lead any major policy shift. Nevertheless her viewpoint will matter. And while the Obama Administration’s original choice for the chairmanship, Lawrence Summers, was a strong opponent of the rule, Yellen has remained publicly silent to date. In her time as vice chair of the Federal Reserve she hasn’t publicly disagreed with current Chair Ben Bernanke’s views. Though Yellen has a reputation as a strong regulator, there are a few hints in her record that she may be open to flexibility on the rule in this context. In a speech at an International Monetary Conference on June 2, 2013 in Shanghai, she said: “Some have proposed ideas for … separation of commercial banking from investment banking … I am not persuaded that such blunt approaches would be the most efficient …”

This statement suggests Yellen views the heart of the Volcker approach–focused on separating investment banking from commercial banking–skeptically. This, combined with her pro-NMTC and LIHTC statements suggests that Yellen could be sympathetic to exempting those tax credits from the Volcker rule.

In short, the nomination of Janet Yellen to the Federal Reserve chairmanship appears to be positive news for the NMTC and LIHTC.